FIN302: Week 2 - 8.31-9.4
FIN302: Week 2 - 8.31-9.4 FIN302
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This 6 page Class Notes was uploaded by Giulia Dias Roncoletta on Wednesday September 9, 2015. The Class Notes belongs to FIN302 at University of Miami taught by Frank Peterson in Summer 2015. Since its upload, it has received 287 views. For similar materials see FIN 302 - Fundamentals of Finance in Finance at University of Miami.
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Date Created: 09/09/15
Date Monday August 31 st 2015 Chapter Cont of The big picture Chapters 14 Equities ownership interest of company Common stock holders get to vote claim against company Preferred stock holders do not get to vote bonds fixed dividend but they hold priority of claim Depository receipts ADR foreign you can invest in entire markets not just individual stocks Derivatives Standardized contracts that can be traded buysell used as in investment which derived from financial assets A Option Contract one party has the voice of reason 1 Call Option Let s say the stock s market value is 100 but if you give me 5 i ll sell it to you for 110 YES Now the stock s market value is 120 but you can call and force me to sell it to you at 110 If the price stays the same or lowers there s no value for this contract if it raises its perfect 2 Put Option You have a stock worth 100 If you pay me 5 I ll buy it from you for 90 YES The price goes down on market to 80 yet i still need to pay you 90 because you can put a contract Even if you don t have a stock you can buy it at 80 and immediately sell it to me for 90 B Future Contract decide on transaction prior to the happening of event agreeing to a transaction in advance Let s say a cruise ship wants to take a trip 6 months from now so they buy the fuel now so you can stay in budget even if the price goes up They set up a fuel price before so they will pay that set price no matter the situation reduced risk for both parties Financial Markets provide liquidity for securities 4 Types of markets 1 Direct Search Markets locate buyer and seller on their own ie you go on craigslist to find a selling car or you post your selling car on craigslist 2 Brokered Markets third party assistance in buyingselling middle man Le a broker for realestate they don t own the asset 3 Dealer Market third party owns inventory and sells it ie macy s buy for lower than they sell bidask spread 4 Auction Markets no middle man no brokers buyers and sellers get matched up in one network Primary vs Secondary Markerts a Primary initial issuance of security investment banks public and private offerings b Secondary existing owners sell to different party the issuing firm is not involved MARKET INDEX how you find out how the market is doing Dow Jones Industrial Average oldest SampP 500 most widely traded NASDAQ most stocks tech related Wilshire 5000 half of all stocks Nikkei Japan FTSE London DAX Germany International Bondlndexes S quotSquot3939gtS quot39L Date Wednesday September 2nd 2015 Chapter Cont of The big picture Chapters 15 2 Purposes of Index 1 Feel how the market is doing 2 compare yourself to the market gt index funds Sector funds invest in industry sectors E tech sector of industry By Market Capitalization 8y Count of listed Stocks 1 Dow Jones Industrial Average 30 largest most influential companies in the US includes every sector but transportation poor benchmark for overall market since there are 10000 companies uses price weighted average 2 SampP 500 Most widely traded stocks best measure of the market as a whole 70 of all industries in US economy proportional to total market value of company larger value larger weight A capitalizationweighted 3 NASDAQ 2 billion shares daily has the most lPOs 3100 companies heavily weighted on technology generally smaller companies also capitalization weighted NASDAQ will always outperform doesn39t mean you must invest NASDAQ is riskier it goes up higher when good and goes down low when bad Corporation Legal form of organization Viewed as a separate legal entity Corporations are like people from a legal stand point Peterson Personal assets are protected Never named in a lawsuit if you39re a corporation there is limited liability Potentially infinite life unless broke or shut down May have multitude or owners ownership is transferable stocks Problem double taxation taxed for own income 60 tax rate your corporation then you There is a representative management board of directions Capital gains gt tax rate is 15 but only earned when sold Dividend are taxed normally gt 39 shareholders can vote PUBLIC PRIVATE 39 Traded on stock exchange 39 Limited as to how stock is sold 39 There are laws protecting investors 1930s 39 Info hasn39t been displayed or disclosed security regulations 39 Investors aren39t aware of company s info 39 purely disclosed no fraud 39 Private equity firms healthy investors show 39 easy transfer of ownership open market interest bring management capital and fix up 39 ease of raising equity capital the company and make a profit if potential 39 IPO going public valuegt current price 39 Investment Banks facilitate the IPO transaction 39 Venture capital invest equity at start up also issue for bonds for government and company sharktank companies Buy public make private risky leveraged buy out LBO Privately Held Firms can t have more than 499 share holders no public disclosure private placement offers sold directly to small groups of investors shares don t trade in secondary markets Publicly Traded Companies securities sold to public secondary markets IPO first sale of stock Investment banks offer services for IPO registration statement and prospects priorly disclosed every quarter with a 100 form quarterly financial statement Date Friday September 4th 2015 Chapter Cont of The big picture Chapters 15 There are different types of investment companies a Unit Investment Trusts b Managed Investment Companies 1 openend fund mutual most money invested 2 closeend funds c Real Estate Investment Trusts d Hedge Fund extremely risky Categories of Mutual Funds based on investment policy Money market funds safety very liquid low return Equity Funds actively managed best market to buy Index Funds passive managements matches market performance low costs since not actively managed Sector Funds specific categories Bond Funds International Funds Balanced Funds hold both equities and fixedincome stable proportion40 oequity60 ofixed Asset Allocation Funds ETF exchange traded fund similar to mutual funds traded like stock and not actively managed Investment Process gt Asset Allocation is the determinant of a portfolio s return risk tolerance time horizon liquidity needs gt Security Selection within asset class choose specific security Investment Styles Active Management research on winning stocks identified undervalued invest in lows always check time of when to go in and out of market Chase high returns and expensive research Passive Management accept market average without any attempt to out perform the market average no attempt to time the market movements hold diversified portfolio indexing minimizes expenses Types of Orders Market Order execute immediately at best price Condition bid price dealer s buying price Price falls below Price rises above the limit the limit ask price dealer s selling price when you buy asked price when you sell bid price Limit buy Stopbuy 5 Buy order order Price Contingent order dont do It now only do It If the 5 price acts up or down look at image 393 Stoploss Limit sell Sell order order StopLoss sell if price goes below limit own it wants to sell because afraid it ll go down even more StopBuy buy if price goes above limit don t own need to buy buy when its going up because of momentum it ll keep going up LimitSell sell if price goes above limit own it and want to tell because you think its overprices and you want to capture your paper profits LimitBuy buy if price goes below limit don t own want to buy because hopes it will go up from here on Trading Cost gt Commission fee paid for making transactions broker commission dealer makes commission off asked price ask to bid spread gt Spreadcost of trading with dealer bid price dealer s buying price ask price dealer s selling price bidask spread dealer s profit gt Management Fees and Loads on mutual funds loads are of investment up front or after needs to be paid Buying on Margin buy stock use broker s money to pay usually 50 of stock price with interest stock becomes collateral for the loan investor s own money margin investor s equity Initial Margin must be at least 50 of investment INITIAL MARGIN REQUIREMENT
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